Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to Amendments to CDSClear Reference Guide To Allow Index Basis Packages Margining, 947-949 [2020-00062]

Download as PDF Federal Register / Vol. 85, No. 5 / Wednesday, January 8, 2020 / Notices Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CBOE–2019–126 and should be submitted on or before January 29, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.36 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–00061 Filed 1–7–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87881; File No. SR–LCH SA–2019–009] Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to Amendments to CDSClear Reference Guide To Allow Index Basis Packages Margining jbell on DSKJLSW7X2PROD with NOTICES January 2, 2020. I. Introduction On October 29, 2019, Banque Centrale de Compensation, which conducts business under the name LCH SA (‘‘LCH SA’’ or ‘‘CDSClear’’), filed with the Securities and Exchange Commission (‘‘Commission’’) pursuant to Section 19(b)(1) of the Securities Exchange Act 36 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 17:18 Jan 07, 2020 Jkt 250001 of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder 2 a proposed rule change relating to amendments to the CDSClear Reference Guide (the ‘‘CDSClear Risk Methodology’’) to allow Index Basis Packages margining. The proposed rule change was published for comment in the Federal Register on November 19, 2019.3 The Commission did not receive comments regarding the proposed rule change. For the reasons discussed below, the Commission is approving the proposed rule change. II. Description of the Proposed Rule Change LCH SA is proposing to amend its CDSClear Risk Methodology in order to allow Index Basis Packages margining as a single instrument.4 LCH SA CDSClear currently clears CDS on a number of indices such as iTraxx Main, iTraxx Cross-over, iTraxx Senior Financials as well as all the Single Name constituents of these indices. Indices and their constituents are currently managed and margined as independent instruments. However, market participants may execute Index Basis Packages consisting of an Index CDS trade and individual Single Name CDS trades on each of the reference entities constituents of such Index perfectly offsetting the Index. A transaction would need to satisfy the following criteria to constitute an Index Basis Package: • The package is constituted of an Index CDS and Single Name CDS on all the entities constituting the index; • The position (Long/Short) on the Index offsets the positions on the Single Names (Short/Long); • The notional of the Index and across all the Singles Names match exactly; • All the Single Names CDS trades have the same currency, coupon, and maturity as constituents of the Index CDS; and • All the Single Name CDS trades have the same Seniority, ISDA Definition and Restructuring Clause as constituents of the Index CDS. Clearing Members and/or Clients would be required to identify all trades being part of an Index Basis Package and to notify LCH SA CDSClear. CDSClear would then perform controls to ensure all principles and requirements stated 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Self-Regulatory Organizations; LCH SA; Notice of Filing of Proposed Rule Change Relating to Amendments to CDSClear Reference Guide To Allow Index Basis Packages Margining; Exchange Act Release No. 87522 (Nov. 13, 2019); 84 FR 63912 (Nov. 19, 2019) (‘‘Notice’’). 4 The description herein is substantially excerpted from the Notice, 84 FR 63912. 2 17 PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 947 above for qualifying the trades as an Index Basis Package are satisfied and would flag them with a common ID number. These trades would continue to be margined as different trades until LCH SA completes these controls and confirms the qualification as an Index Basis Package. Once an Index Basis Package is validated as complete, the margin enhancement proposed in the current rule change would then be applied as part of the overnight margin calculation. In order to ensure that the trades continue to meet the criteria of an Index Basis Package, controls would be performed every day at the start of the overnight batch process. Index Basis Packages identified and flagged as such would be excluded from compression runs with the rest of the portfolio in order to avoid breaking any packages. Index Basis Packages could be unflagged as such at the Clearing Member and/or Client’s request. The Index CDS and the Single Name CDS would then be treated and margined separately as per the current framework. In case of a Clearing Member’s default, CDSClear would have the ability to liquidate Index Basis Packages in a dedicated auction should it be advised to do so by the Default Management Group in order to minimize the liquidation costs. A. Proposed Changes to CDSClear Risk Methodology In order to take into account the specific risk created by Index Basis Packages positions, LCH SA proposes to amend the calculation of the Spread Margin and the calculation of the Liquidity Charge Margin as described in its Reference Guide, CDSClear Margin Framework. 1. Spread Margin LCH SA CDSClear currently considers an Index Basis Package as multiple instruments in the calculation of its Spread Margin. In accordance with the portfolio margining requirements under Article 27 of Commission Delegated Regulation (EU) No 153/2013 5 (the ‘‘RTS’’), LCH SA CDSClear applies a cap of 80% to the possible margin offsets reduction. Therefore, the Spread Margin of an Index Basis Package is calculated as the maximum between the expected shortfall of the package and 20% of the sum of the expected shortfalls 5 See https://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=OJ:L:2013:052: 0041:0074:EN:PDF. E:\FR\FM\08JAN1.SGM 08JAN1 948 Federal Register / Vol. 85, No. 5 / Wednesday, January 8, 2020 / Notices calculated for each components of the package. CDSClear believes that this does not appropriately reflect the actual risk of an Index Basis Package meeting the criteria stated above, so it is proposing to amend its CDSClear Risk Methodology in order to consider Index Basis Packages identified as such as a single instrument when calculating the amount of margins required. In particular, the 80% cap on offsets between the components of the Index Basis Package would not be applied in the calculation of the Spread Margin, but would be maintained between an Index Basis Package and all the other positions in the portfolio. This may result in a lower amount of margin being collected on an Index Basis Package. In the opinion published in April 2017 6 and clarifying the application of Article 27 of the RTS, the European Securities and Market Authority (‘‘ESMA’’), acknowledges the low level of risk presented by a package consisting of a future on an index and futures on each of the constituents of the index and allows a CCP to acknowledge margin reduction in excess of 80% in this specific case. This proposal acknowledges this position. 2. Liquidity Charge Margin Considering that an Index Basis Package would likely be sold off in a dedicated auction in case of default of a Clearing Member, LCH SA also proposes to amend the calculation of the Liquidity Charge Margin described in the CDSClear Risk Methodology in order to better reflect the actual cost it would incur when liquidating an Index Basis Package. CDSClear proposes to charge a specific bid/ask spread for each Index family underlying an Index Basis Package identified as such rather than use the current Liquidity Charge Margin algorithm based on charging bid/ask spreads for each individual component in the package taken independently. The current Liquidity Charge Margin methodology would nevertheless remain in the calculation specific to Index Basis Packages identified as such by acting as a cap to the new calculation method. Because the bid/ask spread may be smaller, a lower amount of this category of margin could be collected. jbell on DSKJLSW7X2PROD with NOTICES 3. Other Exclusions Finally, Index Basis Packages flagged as such would be excluded from the Recovery Risk, Interest Risk, or Wrong Way Risk Margin calculations as by construction Index Basis Packages are immune to the risks these margins aim at capturing. III. Discussion and Commission Findings Section 19(b)(2)(C) of the Act directs the Commission to approve a proposed rule change of a self-regulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization.7 For the reasons given below, the Commission finds that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act 8 and Rules 17Ad–22(e)(6)(i) and (iii) thereunder.9 A. Consistency With Section 17A(b)(3)(F) of the Act Section 17A(b)(3)(F) of the Act requires, among other things, that the rules of LCH SA be designed to promote the prompt and accurate clearance and settlement of securities transactions and, to the extent applicable, derivative agreements, contracts, and transactions, as well as to assure the safeguarding of securities and funds which are in the custody or control of LCH SA or for which it is responsible, and, in general, to protect investors and the public interest.10 As discussed above, the proposed rule change would amend the LCH SA CDSClear Risk Methodology to allow Index Basis Packages margining as a single instrument. As a result, LCH SA would require a lesser amount of margin to better reflect the lower risk of an Index Basis Package compared to its individual component instruments. The Commission believes that these changes would help ensure that LCH SA’s margin requirements are commensurate with the risks associated with clearing Index Basis Packages, which in turn would help ensure that LCH SA does not require higher margins than necessary and that Clearing Members are able to effectively accumulate and manage their financial resources. Additionally, as noted above, LCH SA also proposes to amend the calculation of the Liquidity Charge Margin to better reflect the actual cost it would incur when liquidating an Index Basis Package. Similarly, LCH SA proposes to exclude Index Basis Packages from inapplicable margin calculations such as the Recovery Risk, Interest Risk, and Wrong Way Risk Margin calculations 7 15 6 See https://www.esma.europa.eu/sites/default/ files/library/esma70-708036281-18_opinion_on_ portfolio_margining.pdf. VerDate Sep<11>2014 17:18 Jan 07, 2020 Jkt 250001 U.S.C. 78s(b)(2)(C). U.S.C. 78q–1(b)(3)(F). 9 17 CFR 240.17Ad–22(e)(6)(i) and (iii). 10 15 U.S.C. 78q–1(b)(3)(F). 8 15 PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 because Index Basis Packages are not subject to these risks. Similar to the Spread Margins discussed above, the Commission believes that these changes would result in the collection of margins more commensurate to the risks associated with clearing Index Basis Packages, which in turn would help ensure that LCH SA does not require higher margins than necessary and that Clearing Members are able to effectively accumulate and manage their financial resources. Taken together, the Commission believes that these changes would enhance the operation and effectiveness of LCH SA’s margin collection system, which is necessary to manage LCH SA’s credit exposures to its Clearing Members and the risks associated with clearing security based swap-related portfolios. By managing such exposures and risks, LCH SA’s margin system helps it avoid losses that could result from the mismanagement of such credit exposures and risks. Because such losses could disrupt LCH SA’s ability to promptly and accurately clear security based swap transactions, by making the above-described improvements to LCH SA’s margin system, the proposed rule change would help promote the prompt and accurate clearance and settlement os securities transactions. Similarly, given that such losses could threaten LCH SA’s access to securities and funds in LCH SA’s control, by making the above-described improvements to LCH SA’s margin system, the Commission believes that the proposed rule change would help assure the safeguarding of funds and securities which are in the custody or control of LCH SA or for which it is responsible. As noted above, the Commission believes that these changes also would help promote the prudent and accurate accumulation and management of financial resources by both LCH SA and its Clearing Members. Therefore, for the reasons stated above, the Commission finds that the proposed rule change would promote the prompt and accurate clearance and settlement of securities transactions, assure the safeguarding of securities and funds in LCH SA’s custody and control, and, in general, protect investors and the public interest, consistent with the Section 17A(b)(3)(F) of the Act.11 B. Consistency With Rule 17Ad– 22(e)(6)(i) Rule 17Ad–22(e)(6)(i) requires a covered clearing agency that provides central counterparty services to cover its credit exposures to its participants by establishing a risk-based margin system 11 15 E:\FR\FM\08JAN1.SGM U.S.C. 78q–1(b)(3)(F). 08JAN1 Federal Register / Vol. 85, No. 5 / Wednesday, January 8, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES that, as applicable, considers, and produces margin levels commensurate with, the risks and particular attributes of each relevant product, portfolio, and market.12 As noted above, LCH SA is proposing to amend its CDSClear Risk Methodology in order to allow Index Basis Packages margining as a single instrument as long as it meets the criteria noted above. As a result, LCH SA would amend its Spread Margin and Liquidity Charge Margin so that these margin requirements reflect a single rather than separate trades, which may result in a lower level of margin being collected. The Commission believes that these changes would help ensure that LCH SA’s margin requirements are commensurate with the risks associated with clearing Index Basis Packages, including by reflecting the lower risk levels commensurate with Index Basis Packages viewed as a single instrument, as opposed to the individual component instruments that make up the Index Basis Package. Therefore, for the above reasons the Commission finds that the proposed rule change is consistent with Rule 17Ad–22(e)(6)(i).13 C. Consistency With Rule 17Ad– 22(e)(6)(iii) Rule 17Ad–22(e)(6)(iii) requires a covered clearing agency that provides central counterparty services to cover its credit exposures to its participants by establishing a risk-based margin system that, as applicable, calculates margin sufficient to cover its potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default.14 As noted above, with respect to the liquidity charge margin, LCH SA proposes to charge a specific bid/ask spread for each Index family underlying an Index Basis Package identified as such, rather than use the current Liquidity Charge Margin algorithm based on charging bid/ask spreads for each individual component in the package taken independently. These proposed changes reflect that, in the event of a Clearing Member default, Index Basis Packages most likely would be sold off as a single instrument in a dedicated auction, rather than broken apart into individual components with each component instrument sold in an independent auction. By helping to ensure that the liquidity charge margin applied to Index Basis Packages would be commensurate with the risks associated with clearing Index Basis 12 17 CFR 240.17Ad–22(e)(6)(i). CFR 240.17Ad–22(e)(6)(i). 14 17 CFR 240.17Ad–22(e)(6)(iii). 13 17 VerDate Sep<11>2014 17:18 Jan 07, 2020 Jkt 250001 Packages, the Commission believes that the proposed rule change would be consistent with the requirement to have margin sufficient to cover potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default. IV. Conclusion On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act, and in particular, with the requirements of Section 17A(b)(3)(F) of the Act 15 and Rules 17Ad–22(e)(6)(i) and (iii) thereunder.16 It is therefore ordered pursuant to Section 19(b)(2) of the Act 17 that the proposed rule change (SR–LCH SA– 2019–009), be, and hereby is, approved.18 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–00062 Filed 1–7–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Sunshine Act Meetings Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Public Law 94–409, that the Securities and Exchange Commission Asset Management Advisory Committee (‘‘AMAC’’) will hold a public meeting on Tuesday, January 14, 2020 at 9:00 a.m. PLACE: The meeting will be held in Multi-Purpose Room LL–006 at the Commission’s headquarters, 100 F Street NE, Washington, DC. STATUS: The meeting will begin at 9:00 a.m. and will be open to the public. Seating will be on a first-come, firstserved basis. Doors will open at 8:30 a.m. Visitors will be subject to security checks. The meeting will be webcast on the Commission’s website at www.sec.gov. MATTERS TO BE CONSIDERED: On December 30, 2019, the Commission TIME AND DATE: 15 15 U.S.C. 78q–1(b)(3)(F). CFR 240.17Ad–22(e)(6)(i) and (iii). 17 15 U.S.C. 78s(b)(2). 18 In approving the proposed rule change, the Commission considered the proposal’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 19 17 CFR 200.30–3(a)(12). 16 17 PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 949 published notice of the Committee meeting (Release No. 34–87835), indicating that the meeting is open to the public and inviting the public to submit written comments to the Committee. This Sunshine Act notice is being issued because a majority of the Commission may attend the meeting. The meeting will include a discussion of various aspects of the asset management industry as well as administrative items. CONTACT PERSON FOR MORE INFORMATION: For further information, please contact Vanessa A. Countryman from the Office of the Secretary at (202) 551–5400. Dated: January 6, 2020. Vanessa A. Countryman, Secretary. [FR Doc. 2020–00168 Filed 1–6–20; 4:15 pm] BILLING CODE 8011–01–P SURFACE TRANSPORTATION BOARD [Docket No. FD 36372] Union Pacific Railroad Company— Temporary Trackage Rights Exemption—BNSF Railway Company Union Pacific Railroad Company (UP), a Class I rail carrier, has filed a verified notice of exemption under 49 CFR 1180.2(d)(8) for the acquisition of temporary overhead trackage rights over an approximately 51.7-mile rail line of BNSF Railway Company (BNSF) between milepost 579.3 near Mill Creek, Okla., on BNSF’s Creek Subdivision and milepost 631.0 near Joe Junction, Tex., on BNSF’s Madill Subdivision, pursuant to the terms of a Temporary Trackage Rights Agreement (Agreement).1 UP states that the purpose of the temporary trackage rights is to permit it to move empty and loaded unit ballast trains solely for UP’s maintenance of way projects. The Agreement provides that the trackage rights are temporary in nature and are scheduled to expire on December 31, 2020. The transaction may be consummated on or after January 22, 2020, the effective date of the exemption (30 days after the verified notice was filed). As a condition to this exemption, any employees affected by the acquisition of the temporary trackage rights will be protected by the conditions imposed in Norfolk & Western Railway—Trackage Rights—Burlington Northern, Inc., 354 I.C.C. 605 (1978), as modified in Mendocino Coast Railway—Lease & Operate—California Western Railroad, 360 I.C.C. 653 (1980), and any 1 A copy of the Agreement was filed with the verified notice. E:\FR\FM\08JAN1.SGM 08JAN1

Agencies

[Federal Register Volume 85, Number 5 (Wednesday, January 8, 2020)]
[Notices]
[Pages 947-949]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-00062]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87881; File No. SR-LCH SA-2019-009]


Self-Regulatory Organizations; LCH SA; Order Approving Proposed 
Rule Change Relating to Amendments to CDSClear Reference Guide To Allow 
Index Basis Packages Margining

January 2, 2020.

I. Introduction

    On October 29, 2019, Banque Centrale de Compensation, which 
conducts business under the name LCH SA (``LCH SA'' or ``CDSClear''), 
filed with the Securities and Exchange Commission (``Commission'') 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ a proposed rule change 
relating to amendments to the CDSClear Reference Guide (the ``CDSClear 
Risk Methodology'') to allow Index Basis Packages margining. The 
proposed rule change was published for comment in the Federal Register 
on November 19, 2019.\3\ The Commission did not receive comments 
regarding the proposed rule change. For the reasons discussed below, 
the Commission is approving the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change Relating to Amendments to CDSClear Reference 
Guide To Allow Index Basis Packages Margining; Exchange Act Release 
No. 87522 (Nov. 13, 2019); 84 FR 63912 (Nov. 19, 2019) (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    LCH SA is proposing to amend its CDSClear Risk Methodology in order 
to allow Index Basis Packages margining as a single instrument.\4\ LCH 
SA CDSClear currently clears CDS on a number of indices such as iTraxx 
Main, iTraxx Cross-over, iTraxx Senior Financials as well as all the 
Single Name constituents of these indices. Indices and their 
constituents are currently managed and margined as independent 
instruments. However, market participants may execute Index Basis 
Packages consisting of an Index CDS trade and individual Single Name 
CDS trades on each of the reference entities constituents of such Index 
perfectly offsetting the Index.
---------------------------------------------------------------------------

    \4\ The description herein is substantially excerpted from the 
Notice, 84 FR 63912.
---------------------------------------------------------------------------

    A transaction would need to satisfy the following criteria to 
constitute an Index Basis Package:
     The package is constituted of an Index CDS and Single Name 
CDS on all the entities constituting the index;
     The position (Long/Short) on the Index offsets the 
positions on the Single Names (Short/Long);
     The notional of the Index and across all the Singles Names 
match exactly;
     All the Single Names CDS trades have the same currency, 
coupon, and maturity as constituents of the Index CDS; and
     All the Single Name CDS trades have the same Seniority, 
ISDA Definition and Restructuring Clause as constituents of the Index 
CDS.
    Clearing Members and/or Clients would be required to identify all 
trades being part of an Index Basis Package and to notify LCH SA 
CDSClear. CDSClear would then perform controls to ensure all principles 
and requirements stated above for qualifying the trades as an Index 
Basis Package are satisfied and would flag them with a common ID 
number. These trades would continue to be margined as different trades 
until LCH SA completes these controls and confirms the qualification as 
an Index Basis Package.
    Once an Index Basis Package is validated as complete, the margin 
enhancement proposed in the current rule change would then be applied 
as part of the overnight margin calculation.
    In order to ensure that the trades continue to meet the criteria of 
an Index Basis Package, controls would be performed every day at the 
start of the overnight batch process.
    Index Basis Packages identified and flagged as such would be 
excluded from compression runs with the rest of the portfolio in order 
to avoid breaking any packages.
    Index Basis Packages could be un-flagged as such at the Clearing 
Member and/or Client's request. The Index CDS and the Single Name CDS 
would then be treated and margined separately as per the current 
framework.
    In case of a Clearing Member's default, CDSClear would have the 
ability to liquidate Index Basis Packages in a dedicated auction should 
it be advised to do so by the Default Management Group in order to 
minimize the liquidation costs.

A. Proposed Changes to CDSClear Risk Methodology

    In order to take into account the specific risk created by Index 
Basis Packages positions, LCH SA proposes to amend the calculation of 
the Spread Margin and the calculation of the Liquidity Charge Margin as 
described in its Reference Guide, CDSClear Margin Framework.
1. Spread Margin
    LCH SA CDSClear currently considers an Index Basis Package as 
multiple instruments in the calculation of its Spread Margin. In 
accordance with the portfolio margining requirements under Article 27 
of Commission Delegated Regulation (EU) No 153/2013 \5\ (the ``RTS''), 
LCH SA CDSClear applies a cap of 80% to the possible margin offsets 
reduction. Therefore, the Spread Margin of an Index Basis Package is 
calculated as the maximum between the expected shortfall of the package 
and 20% of the sum of the expected shortfalls

[[Page 948]]

calculated for each components of the package.
---------------------------------------------------------------------------

    \5\ See https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:052:0041:0074:EN:PDF.
---------------------------------------------------------------------------

    CDSClear believes that this does not appropriately reflect the 
actual risk of an Index Basis Package meeting the criteria stated 
above, so it is proposing to amend its CDSClear Risk Methodology in 
order to consider Index Basis Packages identified as such as a single 
instrument when calculating the amount of margins required. In 
particular, the 80% cap on offsets between the components of the Index 
Basis Package would not be applied in the calculation of the Spread 
Margin, but would be maintained between an Index Basis Package and all 
the other positions in the portfolio. This may result in a lower amount 
of margin being collected on an Index Basis Package.
    In the opinion published in April 2017 \6\ and clarifying the 
application of Article 27 of the RTS, the European Securities and 
Market Authority (``ESMA''), acknowledges the low level of risk 
presented by a package consisting of a future on an index and futures 
on each of the constituents of the index and allows a CCP to 
acknowledge margin reduction in excess of 80% in this specific case. 
This proposal acknowledges this position.
---------------------------------------------------------------------------

    \6\ See https://www.esma.europa.eu/sites/default/files/library/esma70-708036281-18_opinion_on_portfolio_margining.pdf.
---------------------------------------------------------------------------

2. Liquidity Charge Margin
    Considering that an Index Basis Package would likely be sold off in 
a dedicated auction in case of default of a Clearing Member, LCH SA 
also proposes to amend the calculation of the Liquidity Charge Margin 
described in the CDSClear Risk Methodology in order to better reflect 
the actual cost it would incur when liquidating an Index Basis Package. 
CDSClear proposes to charge a specific bid/ask spread for each Index 
family underlying an Index Basis Package identified as such rather than 
use the current Liquidity Charge Margin algorithm based on charging 
bid/ask spreads for each individual component in the package taken 
independently. The current Liquidity Charge Margin methodology would 
nevertheless remain in the calculation specific to Index Basis Packages 
identified as such by acting as a cap to the new calculation method. 
Because the bid/ask spread may be smaller, a lower amount of this 
category of margin could be collected.
3. Other Exclusions
    Finally, Index Basis Packages flagged as such would be excluded 
from the Recovery Risk, Interest Risk, or Wrong Way Risk Margin 
calculations as by construction Index Basis Packages are immune to the 
risks these margins aim at capturing.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\7\ For the reasons given below, the Commission finds that 
the proposed rule change is consistent with Section 17A(b)(3)(F) of the 
Act \8\ and Rules 17Ad-22(e)(6)(i) and (iii) thereunder.\9\
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78s(b)(2)(C).
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 17 CFR 240.17Ad-22(e)(6)(i) and (iii).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of LCH SA be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, to the extent 
applicable, derivative agreements, contracts, and transactions, as well 
as to assure the safeguarding of securities and funds which are in the 
custody or control of LCH SA or for which it is responsible, and, in 
general, to protect investors and the public interest.\10\ As discussed 
above, the proposed rule change would amend the LCH SA CDSClear Risk 
Methodology to allow Index Basis Packages margining as a single 
instrument. As a result, LCH SA would require a lesser amount of margin 
to better reflect the lower risk of an Index Basis Package compared to 
its individual component instruments. The Commission believes that 
these changes would help ensure that LCH SA's margin requirements are 
commensurate with the risks associated with clearing Index Basis 
Packages, which in turn would help ensure that LCH SA does not require 
higher margins than necessary and that Clearing Members are able to 
effectively accumulate and manage their financial resources.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Additionally, as noted above, LCH SA also proposes to amend the 
calculation of the Liquidity Charge Margin to better reflect the actual 
cost it would incur when liquidating an Index Basis Package. Similarly, 
LCH SA proposes to exclude Index Basis Packages from inapplicable 
margin calculations such as the Recovery Risk, Interest Risk, and Wrong 
Way Risk Margin calculations because Index Basis Packages are not 
subject to these risks. Similar to the Spread Margins discussed above, 
the Commission believes that these changes would result in the 
collection of margins more commensurate to the risks associated with 
clearing Index Basis Packages, which in turn would help ensure that LCH 
SA does not require higher margins than necessary and that Clearing 
Members are able to effectively accumulate and manage their financial 
resources.
    Taken together, the Commission believes that these changes would 
enhance the operation and effectiveness of LCH SA's margin collection 
system, which is necessary to manage LCH SA's credit exposures to its 
Clearing Members and the risks associated with clearing security based 
swap-related portfolios. By managing such exposures and risks, LCH SA's 
margin system helps it avoid losses that could result from the 
mismanagement of such credit exposures and risks. Because such losses 
could disrupt LCH SA's ability to promptly and accurately clear 
security based swap transactions, by making the above-described 
improvements to LCH SA's margin system, the proposed rule change would 
help promote the prompt and accurate clearance and settlement os 
securities transactions. Similarly, given that such losses could 
threaten LCH SA's access to securities and funds in LCH SA's control, 
by making the above-described improvements to LCH SA's margin system, 
the Commission believes that the proposed rule change would help assure 
the safeguarding of funds and securities which are in the custody or 
control of LCH SA or for which it is responsible. As noted above, the 
Commission believes that these changes also would help promote the 
prudent and accurate accumulation and management of financial resources 
by both LCH SA and its Clearing Members.
    Therefore, for the reasons stated above, the Commission finds that 
the proposed rule change would promote the prompt and accurate 
clearance and settlement of securities transactions, assure the 
safeguarding of securities and funds in LCH SA's custody and control, 
and, in general, protect investors and the public interest, consistent 
with the Section 17A(b)(3)(F) of the Act.\11\
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(6)(i)

    Rule 17Ad-22(e)(6)(i) requires a covered clearing agency that 
provides central counterparty services to cover its credit exposures to 
its participants by establishing a risk-based margin system

[[Page 949]]

that, as applicable, considers, and produces margin levels commensurate 
with, the risks and particular attributes of each relevant product, 
portfolio, and market.\12\ As noted above, LCH SA is proposing to amend 
its CDSClear Risk Methodology in order to allow Index Basis Packages 
margining as a single instrument as long as it meets the criteria noted 
above. As a result, LCH SA would amend its Spread Margin and Liquidity 
Charge Margin so that these margin requirements reflect a single rather 
than separate trades, which may result in a lower level of margin being 
collected. The Commission believes that these changes would help ensure 
that LCH SA's margin requirements are commensurate with the risks 
associated with clearing Index Basis Packages, including by reflecting 
the lower risk levels commensurate with Index Basis Packages viewed as 
a single instrument, as opposed to the individual component instruments 
that make up the Index Basis Package.
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    \12\ 17 CFR 240.17Ad-22(e)(6)(i).
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    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(e)(6)(i).\13\
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    \13\ 17 CFR 240.17Ad-22(e)(6)(i).
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C. Consistency With Rule 17Ad-22(e)(6)(iii)

    Rule 17Ad-22(e)(6)(iii) requires a covered clearing agency that 
provides central counterparty services to cover its credit exposures to 
its participants by establishing a risk-based margin system that, as 
applicable, calculates margin sufficient to cover its potential future 
exposure to participants in the interval between the last margin 
collection and the close out of positions following a participant 
default.\14\ As noted above, with respect to the liquidity charge 
margin, LCH SA proposes to charge a specific bid/ask spread for each 
Index family underlying an Index Basis Package identified as such, 
rather than use the current Liquidity Charge Margin algorithm based on 
charging bid/ask spreads for each individual component in the package 
taken independently. These proposed changes reflect that, in the event 
of a Clearing Member default, Index Basis Packages most likely would be 
sold off as a single instrument in a dedicated auction, rather than 
broken apart into individual components with each component instrument 
sold in an independent auction. By helping to ensure that the liquidity 
charge margin applied to Index Basis Packages would be commensurate 
with the risks associated with clearing Index Basis Packages, the 
Commission believes that the proposed rule change would be consistent 
with the requirement to have margin sufficient to cover potential 
future exposure to participants in the interval between the last margin 
collection and the close out of positions following a participant 
default.
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    \14\ 17 CFR 240.17Ad-22(e)(6)(iii).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
and in particular, with the requirements of Section 17A(b)(3)(F) of the 
Act \15\ and Rules 17Ad-22(e)(6)(i) and (iii) thereunder.\16\
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
    \16\ 17 CFR 240.17Ad-22(e)(6)(i) and (iii).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\17\ that the proposed rule change (SR-LCH SA-2019-009), be, and hereby 
is, approved.\18\
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    \17\ 15 U.S.C. 78s(b)(2).
    \18\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-00062 Filed 1-7-20; 8:45 am]
 BILLING CODE 8011-01-P
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